iSoft makes yet another profit downgrade, fuels speculation of private equity bid
Wednesday, 14 July 2010 10:34
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Gary Cohen
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Troubled software maker iSoft has announced yet another profit downgrade, the second since June, with the company reportedly letting go about 600 staff.
The announcement comes after reports were published suggesting a number of private equity firms are eyeing the company, as its market value has plummeted to just $170 million from a peak of about $1.5 billion.
In an announcement to the Australian Securities Exchange yesterday, chief executive Gary Cohen said the current estimate for the 2010 year is revenue of about $430 million, with EBITDA of approximately $40 million before "exceptional and one-off items".
This comes after a profit downgrade was made in early June, with the company then announcing an expected revenue level of $440-445 million, a decline from a previous downgrade to $500-520 million.
When the June announcement was made, iSoft shares plummeted to a year low of 39c, and then continued to 35c. Today they sit at just 16c, representing a massive 75% decline over the year to date.
Cohen said in a statement that the development of the Lorenzo project has been continually delayed, and development work will go on until 2012.
"This had led to an accounting adjustment of the revenue recognised to June 30, 2010 of $4.1 million. This adjustment does not have any cashflow impact. The additional time required for delivery will mean that the revenue recognition of milestones, which are a fixed amount, under the percentage of completion method, will now be extended over a further 12 months."
"However, the additional time and cost to develop Lorenzo is expected to be supported by monthly revenue receipts during the development period."
The Lorenzo project, under the National Program for IT, is being carried out by the British National Health Service. Cohen has repeatedly said political changes in the country are responsible for the delays.
And while revenue continues to take a beating, it is understood the company is having to shed hundreds of staff. The Australian Financial Review has reported 600 jobs have been shed, with another 500 to come by the end of the year as part of a massive cost-cutting exercise.
The announcement also comes a week after the company acquired a $30 million line of credit from YA Global, a US investment fund. BlackRock Investment Management also bought more stock yesterday, and now holds a 5% stake in the group.
Cohen was contacted for comment by SmartCompany, but no reply was received before publication.
The announcement only fuels speculation private equity firms are eyeing the company. Investment groups including HgCapital, Duke Street Capital and General Atlantic have been named as possible buyers, while 26% stakeholder Oceania Capital Partners has also been named.
Despite the company's protests the downgrades are purely due to the British election upheaval, analysts say management is the problem – specifically Cohen's style. Last month, BBY analyst Mark McDonnell downgraded iSoft from a "buy" rating to "underperform" due to Cohen's management.
"The management weaknesses are most apparent in relation to its inability to provide reliable short-term forecasts of business performance, compounded by its habit of continually blaming factors 'beyond the control' of the company for its business reversals, (whether they have currency movements, project delays or foreign elections)."
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